02048cam a22002657 4500001000700000003000500007005001700012008004100029100002000070245013300090260006600223490004200289500002000331520095800351530006101309538007201370538003601442690005601478700002201534700003201556710004201588830007701630856003801707856003701745w17388NBER20180222001950.0180222s2011 mau||||fs|||| 000 0 eng d1 aGraham, John R.10aFinancial Distress in the Great Depressionh[electronic resource] /cJohn R. Graham, Sonali Hazarika, Krishnamoorthy Narasimhan. aCambridge, Mass.bNational Bureau of Economic Researchc2011.1 aNBER working paper seriesvno. w17388 aSeptember 2011.3 aWe use firm-level data to study corporate performance during the Great Depression era for all industrial firms on the NYSE. Our goal is to identify the factors that contribute to business insolvency and valuation changes during the period 1928 to 1938. We find that firms with more debt and lower bond ratings in 1928 became financially distressed more frequently during the Depression, consistent with the trade-off theory of leverage and the information production role of credit rating agencies. We also document for the first time that firms responded to tax incentives to use debt during the Depression era, but that the extra debt used in response to this tax-driven "debt bias" did not contribute significantly to the occurrence of distress. Finally, we conduct an out of sample test during the recent 2008-2009 Recession and find that higher leverage and lower bond ratings also increased the occurrence of financial distress during this period. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG0 - General2Journal of Economic Literature class.1 aHazarika, Sonali.1 aNarasimhan, Krishnamoorthy.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w17388.4 uhttp://www.nber.org/papers/w1738841uhttp://dx.doi.org/10.3386/w17388